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Rating Action:

MOODY'S CONFIRMS DEBT RATINGS OF SOUTHERN ENERGY, INC. (SR. UNSEC. AT Baa2) AND CONTINUES THE RATING REVIEW OF SOUTHERN COMPANY ENERGY MARKETING, L.P.'S Baa1 ISSUER RATING FOR POSSIBLE DOWNGRADE; AND ASSIGNS A "baa3" RATING FOR THE CONVERTIBLE TRUST PREFE

16 Oct 2000
MOODY'S CONFIRMS DEBT RATINGS OF SOUTHERN ENERGY, INC. (SR. UNSEC. AT Baa2) AND CONTINUES THE RATING REVIEW OF SOUTHERN COMPANY ENERGY MARKETING, L.P.'S Baa1 ISSUER RATING FOR POSSIBLE DOWNGRADE; AND ASSIGNS A "baa3" RATING FOR THE CONVERTIBLE TRUST PREFE

Approximately $2.7 Billion of Securities Affected

New York, October 16, 2000 -- Moody's Investors Service has confirmed the debt ratings of Southern Energy, Inc. (senior unsecured at Baa2, stable outlook). In addition, Moody's has assigned a "baa3" rating for the 6 1/4% Convertible Trust Preferred Securities, Series A issued by SEI Trust I, and a Baa3 rating for the 6 1/4% Junior Convertible Subordinated Debentures, Series A due 2030 issued by Southern Energy, Inc. However, Moody's continues to review Southern Company Energy Marketing, L.P.'s Baa1 issuer rating and the Prime-2 short-term rating for commercial paper for possible downgrade due to the prospective expiration of performance guarantees currently provided by Southern Company, Vastar Resources, ARCO, and SEI. The rating review was initiated on April 17, 2000, following Southern Company's, the parent holding company, decision to sell Southern Energy through an initial public offering of up to 19.9% of Southern Energy's common stock. Southern Company also plans to spin off to holders of Southern Company common stock the remaining ownership of Southern Energy within 12 months of the initial public offering.

On September 26, 2000, Southern Energy raised approximately $1.4 billion of common equity in its inital public offering and $345 million of preferred securities. For nearly two years, Southern Energy has been able to access the capital markets to finance the expansion of its energy investments on its own. Although SEI had upstreamed dividends to its parent company in the past, it will not provide any further dividends to Southern Company on a prospective basis. In fact, SEI will retain all of its earnings to fund future expansions of its non-regulated energy businesses. Given the significant size of the initial public offering as well as good cash flow from Southern Energy's core energy subsidiaries, it continues to have the financial flexibility to access the capital markets for both common equity and debt to support its non-regulated energy businesses. Cash proceeds from the initial public offering will be used to pay down short-term debt and for construction and investment purposes at Southern Energy's various businesses. Southern Energy's non-regulated energy businesses are diversified and all of the investments are generating cash flow. Cash flow to service interest expense at Southern Energy is strong and compares favorably to its respective peers. Southern Energy owns generating assets in North America, has partial ownership interest in regulated electric distribution utilities in the United Kingdom and in Germany, and has investments in several contractual power projects in China and the Philippines. SEI's North America generating portfolio will consist of approximately 12,354 megawatts of capacity, after the financial closing of the acquisition of 5,154-MW of generating assets from Potomac Electric Power Company in November 2000. SEI's U.S. generating assets are well diversified in terms of dispatch profile (29% baseload, 49% mid-merit, and 22% peaking), fuel types (coal, gas, and oil), and regional scope (42% Mid-Atlantic Area Council, 25% Western Systems Coordinating Council, 25% Northeast Power Coordinating Council, 6% Mid-American Interpool Network/East Central Area Reliability Coordination Agreement, and 2% Electric Reliability Council of Texas).

Effective September 2000, Southern Company Energy Marketing (SCEM), the energy trading subsidiary, became 100% owned by Southern Energy. SEI can now better integrate SCEM into its business strategies. At the same time, SCEM can optimize the profitability of SEI's North America generating portfolio, as well as manage risks associated with merchant power in a deregulated market. SCEM's 10-year gas supply contract with Vastar Resources, Inc. remains in place throughout the life of the contract. Moreover, SCEM has strict counterparty and risk management policies in place, as well as trading limits. Each significant counterparty has a separate guarantee that is individually negotiated and executed. Senior management and auditors review trading transactions on a daily basis. The company's significant performance guarantees from Vastar Resources, ARCO, SEI, and Southern Company remain in place to support its energy trading business. Payments will be made under these guarantees only if SCEM's liquidity is exhausted. However, sizable performance guarantees will be expiring within the next six- to twelve-month time period as the transactions backed by these guarantees are completed. The rating review reflects the uncertainty surrounding the expiring performance guarantees. SCEM is currently pursuing alternative methods of credit enhancements. If these performance guarantees are not replaced with equally strong credit enhancements, the debt rating of SCEM will likely be lowered in the next several months.

Ratings confirmed include the following:

Southern Energy, Inc.'s Baa2 senior unsecured debt rating and the Prime-2 short-term rating for the company's commercial paper program.

Southern Energy North America Generating, Inc.'s Baa2 senior unsecured bank loan facilities.

Ratings continued to be on review for possible downgrade:

Southern Company Energy Marketing, L.P.'s Baa1 issuer rating and the Prime-2 short-term rating for the company's commercial paper program.

Southern Energy, Inc. and Southern Company Energy marketing, L.P. are both headquartered in Atlanta, Georgia.

New York
Mo Ying W. Seto
Senior Vice President
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Susan D. Abbott
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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